Benjamin Kuo’s Blog

Earlier this week, FunnyOrDie — the comedy site affiliated with Will Ferrell, and which has offices in Los Angeles — released a new parody video of Paris Hilton in a spoof political campaign ad. Apparently, it was a big hit — the company said today that it has received over 6.2 million views of the video, providing traffic it calls “the highest level in the company’s history.”

Aside from the video, what struck me about the release is the way it highlights the problem of “hits” businesses — businesses which are reliant on hits to drive revenues. Until the Paris Hilton video, the biggest hit that FunnyOrDie had was the very first video it released–”The Landlord.” The issue, of course, is that unless you’ve got a way to generate a consistent number of hits for these stand-alone videos, is it’s tough to get users coming back to your site (which makes it tough to generate enough traffic to be of interest to advertisers, which means it’s tough to generate meaningful revenue.)

It’s the same issue toy companies have — if you don’t have something new every season, your revenues go up and down like a yo-yo. It’s also the same issue a lot of stand-alone, Web 2.0 web sites have — if your traffic is driven by some “cool feature” but aren’t long term winners, or you aren’t constantly creating “cool new features” which people want to use, it’s not going to help in the long run if they don’t monetize in some way.

While having a hit may be well and good, the hard part — at least in the high tech startup world — is being hits driven means investors are a lot more leery of making investments and providing you capital; it means you aren’t going to be able to scale your company; and it’s tough to generate consistent revenues.

How are people trying to avoid the one-hit-wonder problem? On the content side, you’ll notice many content producers focusing on a consistent, regular product — i.e. video podcasts, which tend to attract a long term audience instead of a transitory one, or a linked series where each video is connected to the other. On the Web side, that’s the crux of the idea behind a “platform” — something which has some base functionality where you (or third parties) can continue to add enhancements and new features, rather than being just a “cool feature.” It’s also key that your new Internet service isn’t just “twitter + some cool feature” or “youtube + some cool feature” — it’s important that you’re a base service which you can continue adding significant useful features to and has value independent of just having the latest trendy feature.

Why do I even bother mentioning the hit/feature problem? I seem to run into lots of both “hits” and “incremental feature” businesses, and when you ask them “what’s next beyond this feature” they rarely have an answer. Investors I speak to tell me the same thing.

One thing I haven’t seen in awhile (well, at least since Amp’d Mobile went under) is one of those “our-company-died-sell-off-our-assets-please” auctions.  Looks like Favrille, the San Diego-based biotech firm, now has its facilities and equipment on sale. It’s not a surprise — the firm announced in July that it was pretty much cutting all of its staff and selling off its assets–but it’s been fairly rare. Any San Diego biotech startups looking for cheap equipment?

It used to be that I ran into a lot of people here in town who had some kind of film project going on. It is an old cliche that every waiter and waitress was either working on a project, had a script, or otherwise looking to make it into Hollywood here. Interestingly enough, it seems in recent months I’ve bumped into lots of folks who seem to have some kind of “web project” going on the side–be that a web video series, content-oriented web site, or even consumer Internet startup. It’s never a company, it’s always some “side project.” I’m wondering if this is a sign of a bubble, or just a sign of how much the Internet is affecting Hollywood and the entertainment industry.

I’ve been rather amused to read a number of job posts today from startup companies that describe themselves as “pre-IPO” in trying to attract employees. Given the news today that there were no IPOs in Q2 of this year, it appears that in reality most of the technology startup world is in a permanent “pre-IPO” condition.

Once upon a time, in the world of technology startups, “pre-IPO” meant that your company was planning to go IPO–soon–as your exit strategy. For awhile–during the bubble–that meant you were ready to file, most likely to have an IPO in the next 6-9 months, and basically you were luring the idea of pre-IPO stock to try to grab those employees.

Now, with such a dismal exit environment, I suspect you’re going to have to wait more than a few months (years?) for the “Pre-IPO” company to actually turn into an IPO, if it ever does.

I had some more mapping fun this afternoon, using our venture database data to draw a few informative maps: one, of Palo Alto, and in particular around Sand Hill Road (right off the Stanford campus); the other, of West Los Angeles. (Little known fact: we also have all recent Silicon Valley venture deals, and venture capital firms in our database, because it’s also linked to our sister site, silicontap.com, covering Silicon Valley venture deals).

First, a photo of Palo Alto, which is the heart of Silicon Valley’s venture community:

Next, we have a picture of West Los Angeles (todo: look at this for Orange County, San Diego, Santa Barbara, etc.)

Red dots are technology companies. Green dots are venture capital firms. Blue dots are service providers (lawyers, PR firms, real estate agents, focused on high tech).

One thing Web 2.0 companies have done well, is figure out new ways to get both new media/blogs and the mainstream media to cover their companies, by manufacturing news. In most cases, it’s for “exclusive invites” to join their beta sites.

On that note, It looks like angel backed, Los Angeles firm Orgoo managed to time their “beta invite” release for a good day. Orgoo is developing a browser-based service for managing email, instant messaging, video chat, and SMS. Most journalists and PR folks know that the first day after a long weekend is typically a slow news day — most people rushing out of the offices last week don’t bother to queue up any interesting announcements the day back, plus there are still people out of the office. So–make up some news, tell everyone you give it to that they’ve got a “special” invite, and voila–a ton of blogs cover it. (See: Mashable, VentureBeat, TechCrunch)

I spent last night at a private technology/venture capital networking event in West LA last night, and in speaking with more than a few entrepreneurs have been pleasantly surprised to find that Southern California (and in particular, West Los Angeles) has become — as I think of it — a startup destination. What I mean by a “startup destination” is there are an increasing number of companies who are choosing to locate in Southern California for their startup — not because they live here, or because of personal reasons, or because of being a spinoff from a company or university research — but because it’s seen as a beneficial place to make your company succeed.

For a long time, the only startup destination was Silicon Valley — usually, Palo Alto or surrounding cities– but often San Francisco and other cities in the Bay Area. But, now, it appears, Southern California (and in particular, West Los Angeles) is seen as being an area where there are lots of quality startups, where early stage companies can be with both other startups and possible partners, and where there is a supportive environment for growing and funding a company. I’ve mentioned this before, but I’m seeing this more and more.

I talked to a number of entrepreneurs (who, as an aside, had to do their pitch to VCs while being sniffed by bulldogs owned by Mahalo’s Jason Calacanis) all either recently located to the area, looking at locating to here, or very keen on moving into the area. For some, it was the proximity to consumer Internet firms like Fox Interactive Media/MySpace; for others, because of the studio/Hollywood influence, and for others, just because of the “technology scene.”

Provided these are startups who can either can gain funding, or bootstrap, into a profitable and sustainable business, this is good because it increases the interesting opportunities–for employees, venture firms, service providers, and the economy–and spawns more startup success and activity.

(below: Jason Calacanis and his bulldogs — who have more twitter followers than most startups — and who were busy distracting entrepreneurs from their pitches).

We’ve just posted a new article to our Insights and Opinions section, about The Rookie Advantage. This article comes from a well regarded, local executive (who has been involved in a couple of successful IPOs and a number of mergers & acquisitions here in SoCal)–but who wants to remain anonymous.

How Rookies and Startups Can Maintain Their Unfair Advantage

Late in the 1936 baseball season, a 17-year-old Iowa farm boy struck out
15 St. Louis Browns batters in his first Major League game. Shortly
thereafter, that same pitcher went on to strike out 17 Philadelphia
Athletics batters, an unprecedented feat for anyone, let alone a youth
with no professional sports experience.

How could such a young, inexperienced athlete baffle so many major league
veterans? The answer is simple: the Browns and the Athletics had the
misfortune of facing Bob Feller before anyone wrote The Book on him.

I’ve been quite interested to speak to a number of entrepreneurs recently, who have either recently raised some angel or venture capital, or are in the process of raising some money. They’ve all told me something — which (given the number of people looking for funding, and the correspondingly smaller number of sources of capital) isn’t very surprising: it takes time. A lot of time. A lot more time than you’d think, or want.

One startup I spoke to — whose principals, although they had lots of experience in their own industry but hadn’t had any experience raising money, and had just started fundraising — asked me if I thought they could get an investor signed next week. The vast majority of (funded) entrepreneurs I talk to had been looking for capital for at least six months to a year, if not more, before they scored their first funding round. I have seldom heard of anyone instantly getting a venture round — if nothing else, because of the time involved in pitching, arranging meetings, followup meetings, due diligence, getting all the legal ducks in a row, etc. etc. etc. Even after you’ve got a term sheet in hand, it may still be a few months until you actually have a check in hand.

Surprisingly, the idea that suddenly a rich investor with a fat checkbook can write you a check, today, is a very common misperception I hear from early entrepreneurs. Too many of them are — frankly — in somewhat desperate situations where they need capital NOW to pay their employees or vendors.

So, what’s my unsolicited advice to entrepreneurs, as it pertains to funding?

1. Assume it’s going to take some time to get funding–if it happens at all — and make sure you structure your business so you’re not desperate if there’s a delay. That means, you probably shouldn’t be hiring that employee before you can afford it, and you should forgo those cool Aeron chairs you saw the other day.
2. Look early, look often — if you are going to have some significant capital needs, you should be looking well before you need it — not the day before. And, make sure you’re constantly networking with sources of capital (angels, venture capitalists, others) before you need it.
3. Get your ducks in a row — especially for those early entrepreneurs, make sure you’ve already engaged with an attorney, have the proper legal structure for your firm, and have an adviser who has helped other companies through funding.  It also means you have to absolutely have the stuff that a venture capitalists or angel will want to see–ie, PowerPoint, financials, etc. –ready in your pocket. Not having all of that in order will just delay (if not kill) your funding.
4. Don’t rely on the timing of your first venture round — if you’ve never done this before, you have to assume that you will have to fund your business out of pocket, from family or friends, or another source until at some time you actually might have something venture fundable.
5. Keep moving forward – if you can, given your business, keep moving forward no matter what. The farther you go with your business — in developing your product, service, or market — the more likely it is you’ll actually get funding. A huge number of companies never get beyond the idea stage because the entrepreneur gets stuck in idea stage, where a company is least likely to find funding.

There’s a great quote (of Drew Lipsher of Greycroft Partners) which Scott Kirschner–a New England blogger and writer–recently posted from AlwaysOn Venture Summit East, about “entrepreneurs moving west to find money”

…if the entrepreneur doesn’t believe in his company enough to believe it can succeed here — they need to move it to Silicon Valley — then we don’t need to invest.

Although Lipsher is clearly referring to deals in New England, it’s worth noting–in my humble opinion–that for any technology startup, if you’ve got a sufficiently large opportunity and truly revolutionary technology or business, you will be successful anywhere. Whether that is Los Angeles, San Diego, Palo Alto, Boston, or Des Moines, if you are plugged into your market, have better technology/people/execution/etc. and the opportunity is right, it shouldn’t matter where you are located, physically.

(btw, It happens that Greycroft has an office in Los Angeles, headed by Dana Settle: the firm has invested in Irvine’s K2 Network, and Santa Monica-based ContextNext).